Wise Words on Forecasting

In a matter of two months, a miraculous number of people became experts in virology in order to predict something they know nothing about.

That’s the state of the market today. It also happens to be the state of the market every day — minus the new armchair virologists.

Investors want to know what happens next. We take comfort in thinking we know — especially in extremely uncertain times like these.

The problem lies in predicting a multitude of factors, their effects on businesses, on markets, on people’s behavior, and any randomness that might occur in the process, all while staying unbiased.

In short, we’re not great at predicting the future. In fact, we’re exceptionally bad at predicting the major turning points that have a huge impact on markets.

Yet, investing is about the future so we can’t exactly get away from it. As investors, our decisions always involve some level of uncertainty.

The risk is that we make a decision that turns out to be wrong but we weren’t prepared for it. That’s why risk management is so important. It protects us from ourselves and the consequences of being wrong.

Howard Marks’ latest memo, Uncertainty, covers the unknowable future and poor forecasting in detail. He shared a few of his favorite quotes to make his point:

…to use one of my all-time favorite quotes, from John Kenneth Galbraith:

We have two classes of forecasters: Those who don’t know — and those who don’t know they don’t know.

While on the subject of favorite quotes, I’ll take advantage of the occassion to share some others on this subject that I’ve store up over the years:

No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future. Ian E. Wilson (former Chairman of GE)

Those who have knowledge don’t predict; those who predict don’t have knowledge. Lao Tzu

People can foresee the future only when it coincides with their own wishes, and most grossly obvious facts can be ignored when they are unwelcome. George Orwell

He offered a few more (go read the memo), but I thought I’d drive the point home with some favorites of my own:

History does not tell you of future things happening. — Warren Buffett

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The trouble with market forecasting is not that it is done by unintelligent and unskillful people. Quite to the contrary, the trouble is that it is done by so many really expert people that their efforts constantly neutralize each other, and end up almost exactly in zero. — Benjamin Graham

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In speaking of future prospects it is often difficult to make the distinction clear between what one considers the most desirable in the public interest and what one reckons to be the most probable in the actual circumstances. For unfortunately the course of events which is the most desirable is not always the most probable! — John Maynard Keynes

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Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless. — Peter Bernstein

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People do not care for the idea that any important activity which affects them is as beyond their control as a pair of dancing dice. — Fred Schwed Jr.

In all my 55 years on Wall Street, before I retired to do something vastly more important, I was never able to say when the market would go up or down. Nor was I able to find anybody on Earth whose opinion I would value on the subject of when it would go up and down. — John Templeton

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I’ve listened to a lot of economic briefings, and I’ve had a lot of visits from economists, and I’ve never encountered one who was right consistently. — Howard Marks

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If we really knew what the future will bring that is all we would have to know; but since stock market people can only guess the future and since they have the embarrassing habit of guessing wrongly, it seems best not to lay too much stress upon forecasts. — Benjamin Graham

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There are economic facts and there’s economic predictions and economic predictions are a total waste. — Peter Lynch

No prediction — whether of a repetition of past patterns or of a complete break with past patterns — can be proved in advance to be right. — Benjamin Graham

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A lifetime of investment research has taught me to become more and more humble about making predictions. — John Templeton

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No one, not even the most experienced trader, economist, or businessman can predict with certainty the course of the stock market. — Bernard Baruch

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Forecasting is a notoriously underpaid profession, and extremely risky to boot, so I avoid it. — John Kenneth Galbraith

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We naturally fear the unknown, and the future is always unknown. — Peter Bernstein

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Extrapolation is usually right, but not valuable, and predictions of deviation from trends are potentially profitable but rarely right. So far, macro-economic forecasting doesn’t represent the path to superior investments. — Howard Marks

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Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain. — Peter Bernstein